Question

Denver Hit Recording LLC operates a recording studio in the metro area. During the latest fiscal year, which ended November 30, Denver Hit Recording served 180 clients. Clients are billed at the rate of $90 per hour of studio time. Total revenues for the LLC were $630,000 (based on 7,000 billed hours of studio time).

The company has one direct-cost category (professional labor) and one indirect-cost category (support services). Support service costs are allocated to each client based on the number of professional labor hours billed to the client. Data for the fiscal year just ended:

   Total professional labor costs                          $ 206,500

            Total support services costs                            $ 140,000

A local band formed by a group of Business School students called The Widgets recorded an album at Denver Hit Recording in September, spending 38 hours in the studio. Note that one hour of studio time equals one hour of professional labor.

a) Allocate indirect costs to The Widgets job.

b) Calculate the recording studio’s profit on the job for The Widgets.

c) If a client had spent 17 hours in the studio, how much indirect cost would be allocated to that client’s job?

d) Calculate Denver Hit Recording’s earnings for the year.

Answer 1

(a) Indirect cost (support service) to Widget Job

Total hrs spend = 38 hrs

Indirect cost per hr = 140000/7000 = $20

Indirect cost of Widget = 38 hrs * $ 20 = $760

(b) Profit from Widget Job:-

Total Revenue (38 hrs * 90)	3420
(-) Direct Cost i.e Prof Labour cost (206500/7000) * 38	1121
(-) Indirect cot i.e Support service cost (20 * 38)	760
Profit from Widget Job	1539

(c) If client spent 17 hrs in studio, Indirect cost = (19 hrs * 20) = $380

(D) Earnings of the year :-

Total Revenue	630000
(-) Direct Cost i.e Prof Labour cost	206500
(-) Indirect cot i.e Support service cost	140000
Earnings of the year	283500